The MSME Sector

At A Glance
March 2012 AG-12-03

Micro, small and medium enterprises (MSMEs) have a very important role in developing the Philippine economy. They help reduce poverty by creating jobs for the countrys growing labor force. They stimulate economic development in rural and far-flung areas. They serve as valuable partners to large enterprises as suppliers and providers of support services. They serve as breeding ground for new entrepreneurs and large corporations. A vibrant MSME sector is thus an indication of a thriving and growing economy. Despite policies that aim to provide an enabling environment for MSME development, the sector still faces various constraints that prevent it from realizing its full growth and potential. Sector profile An MSME in the Philippines is defined as any business activity or enterprise engaged in industry, agri-business and/or services that has: (1) an asset size (less land) of up to PhP100 million; and (2) an employment size with less than 200 employees.1 Based on these categories, it is classified as micro, small or medium (Table 1) regardless of the type of business ownership (i.e., single proprietorship, cooperative, partnership or corporation). As of 2010, there were a total of 777,687 business enterprises in the Philippines. Of this figure, MSMEs represented 99.6 percent with 774,664 establishments while large enterprises represented 0.4 percent with 3,023 establishments. Micro enterprises comprised 91.6 percent (709,899) of the total number of MSMEs while small and medium enterprises accounted for 8 percent (61,979) and 0.4 percent (2,786), respectively.

Enterprise Micro Small Medium

Table 1: MSME Classification Category By Asset Size By Number of Employees Up to P3,000,000 1 - 9 employees P3,000,001 - P15,000,000 10 - 99 employees P15,000,001 - P100,000,000 100 - 199 employees

Figure 1. Percentage Distribution of MSMEs by Industry, 2010

Source: 2010 List of Establishments, NSO

Overall, 49.7 percent of MSMEs are engaged in the wholesale/retail trade and repair services with 384,746 business establishments while 14.4 percent (111,366) and 12.5 percent (96,989) are in the manufacturing and hotels/restaurants industries, respectively (Figure 1). MSMEs in real estate, renting and business activities represent 6.1 percent (47,569), and those involved in other community, social and personal service activities account for 5.7 percent (44,209). Other MSMEs (11.6%) are engaged in health and social work (31,547); financial intermediation (26,350); education (13,930); transport storage and communications (9,010); agriculture, hunting and forestry (3,829); construction (2,292); electricity, gas and water (1,307); fishing (1,126); and mining and quarrying (394). In terms of employment generation, MSMEs provided a total of 3,532,935 jobs 2 in 2010 or 62.3% of the total jobs generated by all types of business establishments. Large enterprises generated 2,136,362 jobs. Among MSMEs,
1

Based on the definition under Republic Act No. 9501 or the Magna Carta for MSMEs, which amended RA 8289 and RA 6977 (Magna Carta for Small Enterprises); and on the establishment category used by the National Statistics Office (NSO), respectively. Refers to actual total employment of establishments included in NSOs 2010 List of Establishments; and is different from the employment statistics generated from the Labor Force Survey.

micro enterprises created 1,729,100 (30.5%) jobs while small and medium enterprises generated 1,417,672 (25%) and 386,163 (6.8%) jobs, respectively. MSME employment by industry generally follows the same structure as the number of establishments per industry, with MSMEs engaged in the wholesale and retail trade generating 1,237,917 jobs in 2010 followed by 617,634 jobs in manufacturing, and 479,668 jobs in hotels and restaurants (Table 2).
Industry Table 2. Number of Employees by Industy and Firm Size, 2010 No. of Employees
MICRO SMALL MEDIUM MSMEs LARGE Total

Agriculture, Hunting and Forestry Fishing Mining and Quarrying Manufacturing Electricity, Gas and Water Construction Wholesale/Retail Trade; Repair Services Hotels and Restaurants Transport Storage and Communications Financial Intermediation Real Estate, Renting and Business Activities Education Health and Social Work Other Community Social and Personal Service Activities Total
Source: 2010 List of Establishments, NSO

9,855 3,408 930 259,204 2,608 5,305 816,095 233,525 26,161 80,706 109,214 31,516 51,006 99,567 1,729,100

31,213 5,705 3,878 244,156 20,924 27,781 364,164 224,963 49,399 85,395 122,428 154,515 35,240 47,911 1,417,672

16,515 4,377 1,960 114,274 17,086 17,391 57,658 21,180 16,671 12,377 46,104 37,695 15,615 7,260 386,163

57,583 13,490 6,768 617,634 40,618 50,477 1,237,917 479,668 92,231 178,478 277,746 223,726 101,861 154,738 3,532,935

81,594 14,227 21,201 685,410 56,397 92,819 139,032 22,883 106,331 152,970 578,239 98,770 57,000 29,489 2,136,362

139,177 27,717 27,969 1,303,044 97,015 143,296 1,376,949 502,551 198,562 331,448 855,985 322,496 158,861 184,227 5,669,297

In terms of regional Figure 2: Distribution of MSMEs by Region vs Regional Contribution to Philippine GDP distribution, the top five regions with the most number of MSME establishments and MSME employment are: (1) National Capital Region (NCR) with 209,223 establishments and 1,324,847 jobs; (2) Region 4-A (CALABARZON Cavite, Laguna, Batangas, Rizal, Quezon) with 113,859 establishments and 459,564 jobs; (3) Region 3 (Central Sources: 2010 List of Establishments, NSO and 2009 GRDP, National Statistical Coordination Board (NSCB) Luzon) with 79,019 establishments and 312,507 jobs; (4) Region 7 (Central Visayas) with 45,322 establishments and 232,408 jobs; and (5) Region 6 (Western Visayas) with 45,176 establishments and 188,932 jobs. Figure 2 shows that the regional distribution of MSMEs is in line with economic activity or income level distribution as estimated by the gross regional domestic product (GRDP). Despite representing an array of industries and its capacity to generate employment, the MSME sector in the Philippines has relatively low value added to the economy. The Department of Trade and Industry estimated that MSMEs in the country contribute only 35.7 percent of value added, lower than in other Asian economies such as Indonesia (53.28%), Vietnam (39%) and Thailand (37.8%). Barriers to MSME Growth and Development The constraints that MSMEs often face can generally be categorized as: (1) non-financial barriers (cost of getting electricity, heavy regulation, high tax rates, and corruption); and (2) financial barriers (access to finance). Based on the World Banks indicators on the ease of doing business, the Philippines lags behind its neighboring countries in reducing the number of start-up procedures, cost to start a business (measured in terms of percent of gross national income per capita or GNI pc), and number of tax payments per year (Table 3). These non-financial barriers to MSME development translates to high cost of doing business or poor business environment, and discourages the formation of new MSMEs or the entry of existing MSMEs into larger markets, among others. Other countries with lower costs of doing business have been observed to have larger MSME sectors.

On the other hand, the lack of access to financing has been identified as the most serious constraint to MSME growth and development.

Country Philippines Indonesia Malaysia Singapore Thailand Vietnam

Financing, particularly from external sources Source: Doing Business 2006 and 2012 (http://www.doingbusiness.org), The World Bank such as banks, becomes Table 4. Loans by Government Financial Institutions to MSMEs (in PhP million), 2006-2011 more important as firms GFIs 2006 2007 2008 2009 2010 2011 Total start expanding. Though DBP 11,051 8,515 11,630 7,592 3,282 3,434 45,504 funds have been made LBP 16,214 16,353 20,001 21,883 21,937 21,126 117,514 60 47 36 32 28 39 242 available by government NLDC 202 328 283 276 204 252 1,545 financial institutions PhilExim 1,133 548 184 15 1,880 (Table 4) and private QUEDANCOR SB Corp 3,443 2,690 3,005 1,825 2,459 1,784 15,207 banks, most MSMEs still SSS 304 97 455 186 171 160 1,373 have difficulty accessing Total 32,407 28,578 35,594 31,809 28,080 26,795 183,264 these funds because of: Source: Small Business Corporation (1) insufficient collateral, Figure 3. Bank Loans to MSMEs (in PhP million), 1991-2010 limited credit histories and banking relationships; (2) inadequate financial records and business plans; and (3) high interest rates. MSMEs would thus tend to rely on informal nonbanking channels for financing support (NEDA, 2010). On mandatory lending to Source: Supervisory Data Center, BSP MSMEs, the Bangko Table 5. Selected Finance Indicators, 2009 Sentral ng Pilipinas (BSP) East Asia reported the overIndicator Philippines World & Pacific compliance of banks on Percent of firms with a bank loan/line of credit 33.2 40.4 36.1 the provision of the law Percent of firms using banks to finance investments 21.9 27.5 26.5 to allocate portions of Percent of firms using banks to finance working capital 19.1 30.9 30.4 total loan portfolio to 8.8 15.6 12.6 MSMEs.3 Total bank Proportion of working capital financed by banks (%) 238.4 172.9 161.8 loans to MSMEs have Value of collateral needed for a loan (% of the loan amount) Source: Enterprise Surveys (http://www.enterprisesurveys.org), The World Bank exceeded the mandatory allocation by an average of 11.84 percent (PhP117 billion) from 1991 to 2010 (Figure 3). It has been noted, however, that the bank compliance report does not represent the real situation in bank lending to MSMEs; and that the BSP data represent an aggregate figure and do not show individual bank performance (Lagua, 2012). It would also seem that few MSMEs are benefitting from these bank loans given that only 33.2 percent of all Philippine enterprises (Table 5) have been estimated to have access to financing from formal financial institutions. Table 5 also shows how the Philippines compares to East Asia and the Pacific, and World averages on selected finance indicators. To attain sustainable MSME growth, there is a need to improve the overall business environment, and more importantly, increase access to finance. This would require strong coordination among the national agencies and local government units in effectively implementing MSME-related policies (e.g., Magna Carta for MSMEs, Barangay Micro Business Enterprises Act or RA 9178), particularly on enhancing the provision of MSME credit and other finance services from financial institutions as well as nongovernment organizations engaged in MSME financing.
3

Table 3. Doing Business Indicators Number of Time to start Cost to start a Cost of getting start-up a business business electricity procedures (days) (% of GNI pc) (% of GNI pc) 2005 2011 2005 2011 2005 2011 2005 2011 17 15 47 35 23.9 19.1 762 12 8 151 45 101.7 17.9 1,379 10 4 37 6 26.6 16.4 95.5 6 3 6 3 0.9 0.7 31.1 8 5 33 29 9.2 6.2 77.6 11 9 50 44 27.6 10.6 1,343

Number of tax payments per year 2005 2011 48 47 51 51 35 13 5 5 35 23 32 32

Aggregate mandatory allocation was 5 percent of total net loan portfolio for small enterprises in 1991 (RA 6977); 8 percent for SMEs in 1997 (RA 8289); and 10 percent for MSMEs in 2008 (RA 9501).